Q2 2021 IDEX Corp Earnings Call
[music].
Greetings and welcome to I guess corporations second quarter 2021 earnings conference call at.
All participants are in a listen only mode.
Great question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Michael Yates, Vice President and Chief accounting.
Thank you you may begin. Thank you. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEXX Corp.
Start by saying, Thank you for joining us for a discussion of the IDEXX second quarter 2021 financial highlights last night, we issued a press release outlining our company's financial and operating performance.
All 3 months ending June 30, 2021 the press release, along with the presentation slides to be used during today's webcast can be accessed on our company's website at www Dot I D. E. C. O R. P. Dot com joining me today is Eric Ashman, our Chief Executive Officer and.
Bill Grogan, our Chief Financial Officer.
The format for our call today is as follows we will begin with Eric providing an overview of the state of IDEXX as business, an update on our growth investments and an overview of our order performance and outlook for our end markets. Bill will then discuss our second quarter 2021 financial results and provide an.
Further on our outlook for the third quarter and full year 2021, finally, Erik will conclude with updates on our sustainability and diversity equity and inclusion programs. Following our prepared remarks, we will open the call for your questions.
If you should need to exit the call for any reason you may access a complete replay beginning approximately.
2 hours after the call concludes by dialing the toll free number 8776606853, and entering conference I'd number 13712090, or they may simply log onto our company's homepage for webcast replay.
Before we.
Updating a brief reminder, this call may contain certain forward looking statements that are subject to the safe Harbor language in last Night's press release and in IDEXX as filings with the Securities and Exchange Commission with that I'll now turn this call over to our CEO Eric Ashwin.
Thank you, Mike beginning with our overview on slide 6.
The past year and a half have been among the most dynamic and unpredictable ever experienced but our IDEXX teams stepped up again in Q2 and deliver during an extremely challenging environment. Thank.
Thank you to the IDEXX employees around the world who are working so hard.
Our commercial performance is very strong as we recorded record orders and backlog in the quarter order.
Order trends continued to improve sequentially in all 3 segments are materially above pre pandemic levels. Our day rates are very strong in our OEM ordering patterns of robust only large industrial projects. Many of them in FMT continue to lag of debt. We're beginning to see the move into planning funnels, indicating support for continued phases of organic growth in the back half of 'twenty 'twenty.
And next year.
Our number 1 operating challenge for the quarter was supply chain and logistics disruptions IDEXX is generally a short cycle business. So quick lead times, we typically operate at the component level further down our customer's bill of materials. We're also not very vertically integrated we depend on a tight network of supplier partners often located close by our operating.
Rating units to quick turn our solutions with a minimum of disability.
These reasons the challenging conditions of type material supply and bottleneck logistics tend to lag other industrial companies are agile model does support a quick calibration to today's realities and that helps us exit quicker than many on the back side of a supply side constraint.
Overall.
We believe these disruptions have hit a plateau and we don't see things getting worse and the challenges will continue to be highly variable at the same time, we don't anticipate these disruptions getting better sales most likely they will not subside until the end of this year or early next year.
We anticipated rising importance as the global economy recovered, but like many we did not imagine the sharp range of inquiry.
Increase this narrowed our spread between price capture and material costs, Although we remain positive overall our teams leverage the systematic investments we made a few years ago and pricing management and aggressively deploy 2 sometimes 3 pricing adjustments with precision we are on track to expand our price cost spread to typical levels as we travel through the back half.
For the year.
Well, we spend a lot of time talking about our businesses ability to capture price 1 area I don't want to Miss is our continued focus on operational productivity. Our teams continue to drive margin improvement through 80, 20 simplification lean efforts and through sound Capex deployment, a robust project funnels continue to be another weapon to.
Combat rising costs.
1 project that exemplifies the spirit deserves mention as we discuss Q2 are.
Our energy markets now starting to show some signs of recovery off the bottom are still lagging the overall group.
Our teams are aggressively executing a facility rationalization project to consolidate our scale and focus our human resources and close working.
Ultimately this is a long term value driver for that group, but in the quarter. The project created headwinds for us as equipment was delayed and inventory positions were less than ideal to support production transfers. We expect the project to be back on track and completed by the end of the third quarter.
Overall, I am confident in our path through these choppy recover.
We continue to apply relentless focus from outstanding teams to deliver solutions that matter from high quality businesses that are very well positioned within their application sets.
Moving on to slide 7 we deployed just over $575 million in the first half of the year with our acquisitions of Apple pumps are tech.
And a small investment in a digitalization technologies startup within the fire and rescue space.
We continue to build out processes and capabilities to explore additional strategic investments, we want to make a cross IDEXX our funnel for potential acquisitions is stronger than it has been in the past and we were more aggressive in pursuing opportunities that enhance our business.
Solutions fit well with our style of competition and drive IDEXX like returns.
Early days around integration of Abilene are tech, but we're happy to see that each business is performing well with excellent growth prospects in the near and long term.
Well, we've stepped up our M&A game, we're also investing more existing businesses with a 45.
5 per cent increase from capital spending through the first half of the year.
We're in the process of it.
A expanding IDEXX facilities in China, and India, We project significant ongoing growth opportunities across Asia and these investments are critical to support our local for local approach as we move to the next level of competitive advantage.
We're also focused.
Focus on our digital strategy with our largest investments tied to our areas of higher integration and scale as we seek to drive higher impact for our customers.
Lastly, as I mentioned previously.
We're focused on operational productivity as market dynamics are changing as well as investing in new technology to support growth. This is on both the capex.
And Opex side. Some of these investments are targeted at new applications in high growth areas like components to enable new global broadband satellite networks building batteries for electric vehicles, and providing key products to support the build out of incremental capacity in semiconductor manufacturing day.
These investments are combined with targeted spend in areas to support automation.
Inefficiencies across the shop floor.
This strategic approach to both inorganic and organic investment is already paying off and sets us up for ongoing success for years to come.
Turning to our commercial results on slide 8.
As I mentioned.
Order strength continued in the second quarter, both compared to prior.
<unk> essentially resulting in a backlog build a $65 million in the quarter.
We look across our segments, all rebounded well from the pandemic and delivered strong organic order growth.
Sequentially fluids, and metering technologies in fire and safety diversified products saw increased along with some pretty low first quarter.
Our health <unk>.
Are you in technologies segment also saw increased sequential orders, if we exclude the impact of the Covid testing application deep booking that occurred in Q2.
Order intake across all segments was also above second quarter 2019 levels FMT lags H S T and F. S D due to lower levels of investment in the oil and gas market.
As well as its concentration are in the industrial market, which saw a pre COVID-19 pullback in the second half of 2019.
These commercial results give us confidence in our ability to deliver double digit growth in the second half of the year and continue to highlight the resilience of our businesses and the criticality of our solutions to customers.
Science on slide 9 we provide a deeper look into our primary end markets.
Our focus is shifting from recovery to growth as most of our businesses are now performing above pre pandemic levels, even with pockets of concern around supply chain disruptions from COVID-19 in certain geographies, we're optimistic about the outlook of our end markets and our ability to execute within.
And our fluid metering technologies segment industrial day rates were strong.
Supply chain challenges remain but overall the market trajectory was at or above 2019 levels with only large projects lagging as I mentioned earlier.
Agriculture continued to drive strong growth driven by aging farm equipment and record crop.
Within them.
Water business was stable, we continue to monitor the impact of the federal infrastructure package and U S municipal spending energy and chemical markets continue to trail 2019 levels per.
Primarily due to limited capital investment in the sector as well as a longer project closed cycle.
1 item to highlight for F N T.
As the impact of our F M D acquisition last year.
It's now in our organic figures with its backlog burn last year significant pullback in customers' capital investments it impacted fmt's organic sales by 11% in other words fmt's organic sales for the quarter would've been 19% instead of 8%.
Moving to the health and Science technologies segment, we're seeing recovery in pivot to growth across all our end markets.
Semi content in food, it's Harper continued to perform well driven by strong market demand and winning share and through our targeted growth initiatives. The overall automotive market continued to face supply chain driven challenges, but we outperformed the market due to our product.
Concentration in higher end European vehicles are a I M life science markets continue to perform well as the pandemic impact eased and investments have increased the.
The industrial business within the segment saw a similar result to F. M T.
Finally in our fire and safety diversified products segment dispensing rebounded as large.
Retailers freed up capital and worked through pent up demand for equipment. Our band it business was adversely affected by U S. Automotive production pullbacks due to microprocessors shortages in the second quarter. However, we continue to achieve new platform wins and believe we're well positioned to outperform the market as supply chain constraints ease.
In fire and rescue.
You have to see larger tenders come back and emerging markets remained slow.
We continue to closely monitor market conditions and expect some choppiness in the second half of the year that said, we're confident in the future trajectory of our end markets as well as our ability to execute on our strong backlog and have raised our organic growth expectation for the year.
We have that I would like to turn it over to bill to discuss our financial results. Thanks, Eric I will start with our consolidated financial results on slide 11 Q.
Q2 orders of $751 million were up 44% overall and 39% organically as we built $65 million of backlog in the quarter organic orders grew sequentially.
And year over year in each of our segments as highlighted by Eric on the prior slide.
Second quarter sales of $686 million were up 22% overall and 17% organically, while we experienced a strong rebound from the pandemic across our portfolio, we were impacted by supply chain constraints.
1 channel energy site consolidation, which tempered our results.
The FMT pressure and fluid metering, Eric discussed also had an impact on overall organic sales, excluding FMT organic sales would have been up 22%.
Q2, gross margin expanded by 280 basis points to $44.
6% the year over year increase was primarily driven by increased volume and price capture partly offset by inflation and supply chain impacts excluding the impact of $1.8 million pretax fair value inventory step up charge related to the auto acquisition adjusted gross margin was 44, 9% and.
And was approximately flat sequentially.
Second quarter operating margin was 23, 1% up 340 basis points compared to prior year adjusted.
Operating margin was 24, 4% up 330 basis points compared to prior year, largely driven by gross margin expansion and fixed cost leverage.
Offset by a rebound in discretionary spending and investments I will discuss the drivers of operating income in more detail on the next slide.
Our Q2 effective tax rate was 21, 3%, which was lower than the prior year ETR of 22, 7% due to benefits from foreign sourced income in the second quarter of 2021.
<unk> benefit also drove favorability to our guided range for the quarter.
Q2, adjusted net income was $123 million, resulting in adjusted EPS of $1.61 up 51 or 46% over prior year adjusted EPS.
Finally free cash flow for the quarter was $120 million down 20.
5% compared to prior year and was 98% of adjusted net income.
This result was impacted by a volume driven working capital build higher capex and timing of tax payments, partially offset by higher earnings and working capital efficiency metrics remained strong and the teams continue to do a good job managing the significant volume changes year.
This year.
Moving on to slide 12, which details the drivers of our adjusted operating income.
Adjusted operating income increased $49 million for the quarter compared to prior year or 17% organic growth contributed approximately $41 million flowing through at our prior year gross margin rate.
We maintained positive price material cost within the quarter and leveraged well on the volume increase our high contribution margins helped mitigate the profit headwinds we experienced from the supply chain disruptions.
In the second quarter of 2020 discretionary spending and investment were minimal driven by our strict cost control environment during the pandemic.
Year over as we returned to a spend level in line with our growth and continued strategic investments, we see year over year pressure of about $11 million in line with the guidance. We gave at the beginning of the year.
Even with the incremental spend supply chain and operational issues that tempered our performance, we still achieved a robust 45% organic.
Like flow through.
Flow through has been negatively impacted by the dilutive impact of acquisitions and FX getting us to our reported flow through of 39%.
As we highlighted we expect to reinvest aggressively in the business to drive both organic and inorganic opportunities, we expect that our level of discretion.
<unk> spending as well as associated costs from growth initiatives will similarly reduced organic flow through in subsequent quarters with that I would like to provide an update on our outlook for the third quarter and full year.
Moving on to slide 13.
For the third quarter, we are projecting EPS to range from $1.57.
<unk> 61, we expect organic revenue growth of 14% to 16% and operating margins of approximately 24, 5%.
The third quarter effective tax rate is expected to be 23% and.
And we expect a 1% top line benefit from the impact of FX.
To have double costs in the third quarter are expected to be around $21 million.
Turning to the full year, we are increasing our full year EPS guidance from a previous range of $6.5 to $6.20.
Up to $6.26 to $6.36.
This range includes aerotech, which.
Will contribute 6 cents in the second half of 2021, roughly <unk> <unk> a quarter.
We are also increasing our full year organic revenue growth from 9% to 10% up to 11% to 12%.
We expect operating margins of approximately 24, 5%, we expect FX to provide a 2% benefit to top line results.
In Corp, full year effective tax rate is expected to be around 23%.
Capital expenditures are anticipated to be around $65 million, an increase of around $10 million versus our last call as we increase our investments in growth opportunities.
Free cash flow is expected to be 110% to 115% of net.
Net income lower versus our last guide primarily due to the additional capital spending and higher working capital to support our increased volume.
And corporate costs are expected to be approximately $77 million for the year.
Finally, our earnings guidance excludes any costs earnings associated with future acquisitions or restructuring charges.
With that I'll throw it back to Eric for some final thoughts. Thanks, Bill I'm on the final slide slide 14.
Before we open the call up to questions I'd like to share an update on our ESG journey and the evolution of our company culture.
Pledged earlier this year that we would hire a new chief diversity equity and inclusion officer I'm pleased to announce that I now have Troy Mac.
I can talk to my senior leadership team.
And as just last week from U S. Cellular the fourth largest cellular communications carrier in the United States.
He led significant improvements in their culture and levels of diversity and the work force at IDEXX Correal helped build the global roadmap and success measures for D. N. I. He will help embed the eni deeper in our culture and build inclusively.
<unk> comprehensive capabilities and all our people through training education and coaching.
Let's make sure our systems mitigate bias and create opportunities for everyone no matter their background to reach their full potential at IDEXX I look forward to great things happening with his leadership.
I'd also like to share a nice step, we're taking to improve our energy.
Recently I should say.
Work recently began on a solar array on the growth of our Lucas manufacturing facility in Germany. Once completed next month. This collection of solar panels will be about 1 third the size of the European soccer fields provide 30 per cent of the electricity needs for the facility.
Not only will it help reduce our carbon footprint there we estimate that will save their businesses.
So the 67000 euros in just the first year alone. We anticipate this project will serve as a pilot leading the way for other solar installations on IDEXX facilities around the world.
Lastly, I want to share that the catastrophic flooding that devastated portions of Western Europe earlier. This month has impact impacted many IDEXX employees.
A quarter.
Is this more of the employees at our German fire and safety business better have either had their homes severely damaged or destroyed.
All of our employees are safe living with friends and family as recovery efforts are ongoing and operations continued at our at or better facility, which is not directly impacted by the floods.
Amid all of this destruction and loss once.
We once again saw the spirit of IDEXX come through.
Colleagues from other IDEXX businesses in Germany came to the area to assist.
With pumping equipment from our businesses our people work tirelessly to help draw water from flooded homes sort of a long road to recovery line again, the IDEXX Foundation also paid 100000 to the German Red Cross which is thousands.
The people in the region assisting those impacted.
Well I shared this internally I'm wondering again expressed with our employees at better that we standby you through this terrible tragedy.
Thank you to all the dedicated and selfless IDEXX colleagues, who dropped everything volunteer during this time of need your outstanding examples of what makes this company so special.
With that let me pause and turn it over to the operator for your questions.
Thank you Larry.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
You'd like to ask a question you May press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star 2 if you'd like for them.
Remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Deane Dray with RBC capital markets. Please proceed with your question.
Thank you good morning, everyone.
1 day.
Hey, maybe we can start with Eric early comments in the prepared remarks, and I know you touch so many end markets.
And you know within the diverse product line, but what are the indicators you're looking at that suggests that the supply chain disruptions have peaked and kind of your degree of confidence.
And the reason I'm also asking is like we heard yesterday from GE and 3 am and neither of them sounded as confidence that the worst had passed but that youre sounding, but beth or noticeably more optimistic here. So maybe we can start there. Thanks.
The share gain.
I guess all.
All of this is somewhat relative at this point.
Make no mistake. This is really really tough right now and so theyre staying at steady state of tough is what it is that I don't want to mischaracterize. It there.
For US a couple of things to remember, we're a little less exposed to a lot of the electronics microprocessor things that other businesses are.
<unk> billow materials generally a little bit more streamlined and simplified so we don't have as many aggregations of complex systems, we do a lot of great critical components and we still.
We have a lot of suppliers that are pretty close by that honestly, we drive by on the way to work.
That being said, it's still very difficult for us the indicators we're looking.
Like lead time, what are the quota of lead times and then what is the performance against them.
And look they have lengthened and extended but theyre generally kind of holding at this point and the delivery rates against them, while not great or at least in our world pretty stable at this point. So I just want to emphasize the relative nature.
At thing Thats in say for us, it's very very tough environment, but we see it. The 1 we can now begin to plan around given what we do.
That's real helpful and if we can stay like.
More of a real time analysis here, if we could.
Commentary about your day rates would be helpful.
Full and the mix still not seeing kind of larger projects, yet, but maybe theres. Some front log discussions that you could share any commentary about how July has started thanks.
Sure sure so.
We kind of go back to the end of 2020, we saw.
Most of the acceleration that we're.
The coming within that restoration of industrial day rates in our businesses and as we look at the second quarter and even into the first days of July.
Pretty stable at this point I mean, it's kind of at a healthy clip, we will see it move in terms of price and some things that come up but it is not accelerating at the same rate or is it in our world decelerating.
We're seeing it as stable and then Theres 2 other components that we think a lot about for a ton of IDEXX businesses and they are they are in the project category, but there are different.
Degrees.
In terms of size and scope. So what we are seeing and whats contributing to growth I know will continue into Q3 and Q4 are what we.
He would call lots of small projects. These are discrete things where people are optimizing the system instead of asking for 1 or 2 of something thats, 10% to 20% and they are running they're running their factory of their production lines, but they are trying to optimize it enhance throughput get productivity. Those are the kind of things you can do on the run and so we're seeing that those have been strong contributors.
<unk> and we think they'll continue right past it are the classic larger projects that we and others play with a lot of them in kind of the chemical oil and gas infrastructure spaces.
There's just a general story, there still where those things are delayed.
They were frozen in 2020 that were pushed out into 2021.
Not canceled I will say, what we're starting to hear now and mainly from distributors that are a little closer to the front lines are that those are now starting to turn into quote activity.
Spec transfer in the kind of things you'd start to see ahead of us.
In order in a replenishment cycle on our side when does that happen maybe theres some.
Some of it in the back half of the year certainly at a minimum we start talking about it more in planning and I think it bodes well for the early part of 2022.
Great that was exactly the color we were looking for thank you.
You bet.
Our next question comes from the line of.
Mike Halloran with Robert W. Baird. Please proceed with your question.
Hey, good morning, everyone.
Thank you.
Okay.
Just an update on how youre thinking about the M&A environment your pipeline and how youre thinking about action ability of that pipeline today and I know you've got a fair amount of capacity still sitting.
In front of you and just just curious how how actionable you think that is in the short to medium term here.
Sure sure well I mean.
I kind of put upside down maybe availability side is really really good I mean, we could go through the specific numbers, but we got plenty of availability and firepower to spend.
On the inside we've been talking now for a couple of quarters about the intentionality of the resource build and the time and effort were taken to consider all of the areas, where we'd like to do more business. Some of it through inorganic efforts think of this as a series of concentric circles radiating around places, where we participate today and participate in.
We're actually thinking of some zones, where we're not part not currently part of IDEXX. It could be interesting or have IDEXX like attributes. So we've got the firepower. We're doing more work and then the funnel of things that we're looking at it's very active aggressive and I think in the end actionable now we still are going to take the same discipline that we've had.
To any of the things that we're looking at and it's got to meet certain requirements got to fit into IDEXX Thats got to leverage what we do best.
But I will tell you that we're looking at more things than we have before and probably more areas than we have previously with more people involved and lots of firepower to get the work done.
So it was on that point there are more areas than maybe previously.
A few things.
Guessing, it's not really a change in the strategy, maybe just more iterative and broadening.
Maybe maybe some high level thoughts on what that changes.
Areas that you might be thinking of loosely.
Yeah I like this analogy I used it a second ago I really think about.
It is radiated concentric circles. So there is an anchor position generally and work that we're doing today, whether it's in the fluidics space some of the stuff in life Sciences.
But I think we are willing to extend outward a little bit in terms of what's the solution that we will bring to our customer set.
And so that's maybe the area.
A difference or slight tweak to the model.
With always I mean, we've mentioned an open aperture for at least a couple of years now at least.
An open mind to some things that might be very interesting that we have long considered for IDEXX I don't know that thats different that's always been on the page, but these would be the 2 areas that there's a separate resource space thinking.
Thinking about little further out from what we've done before but still anchor to how we do it in a couple of zones that have always been interesting to us because they have items like attributes.
No that makes sense.
It's part of your question Dean you talked about.
Some of these businesses feeling better about those as they track towards 'twenty.
To maybe just high level, how are you thinking broadly about all the puts and takes you're seeing in the portfolio now and what that means once you hit a more normalized run rate net orders record levels.
Youre seeing some normalization in margin or at least with the pressures from a price cost perspective can look like as you move to.
Through the year.
Timing of some of these later cycle things starts getting a little bit better as you move through this year, maybe late and early next year, you could start seeing a little bit more capex, just how does that all kind of come together. When you are thinking about that 1 to 2 year outlook from your seat.
And what do you think the constraints are on top of that.
Yeah sure. So I think it's a good question and I like the way you phrased. It if you start from the highest level and think about the next couple of years I think you'll start with a very positive perspective.
Recognize that like we're now coming through are pretty acute recovery cycle that isn't completely played out.
Then there's a replenishment cycle that not only I think is reflective.
At the time that we sort of we're all locked away, but I think even ahead of that there was a decent amount of industrial capacity that needs to be put back into the system.
The real question I think as we go as if you think of this as a series of graph lines with very sharp peaks and troughs.
<unk> dynamic in terms of the elements, we're dealing with today.
The other day smoothed out look a little bit more like the Apple agents I think that that becomes a little bit more of a standard operating environment with positive momentum and so many of the dynamics that we're talking about now in terms of when they come back or when they reoccur I think they would be in place and they would be things that would be typically used to looking at and it would feel a little bit normalized.
And in terms of the way that we would operate with favorable wins at our backs and all of the places that we play so.
Think we view it that way, we're planning for it that way that it's.
Positive outlook of positive framework, you just sort of have to navigate some of the puts and takes in there. There's a lot of dynamic variables here, none of which.
<unk> really get in the way of that positive outlook.
And I think the economics associated with that growth would very much look like our traditional profile will lever extremely well some of the facility consolidations that we're executing on this year will be foundational some of that margin improvement and then 2 just as we have proven here as we progress through the year the.
I think ability to go out and capture incremental price to deal with some of the supply chain issues and rising inflation there'll be bad rock as we go forward if the inflationary environment continues on for a couple more quarters.
Appreciate it gentlemen, thank you.
Thanks, Mike.
Our next question comes from the line of Alex.
Teams have been Pontiac with Wells Fargo. Please proceed with your question Hey, guys. Good morning.
When it turns to the Incrementals.
I know you had mentioned from a corporate perspective that discretionary reinvestment, we're going to step up a bit here, which makes sense, but are there any notable changes as we kind of think it across the segments.
Each segment has its own specific challenges that might be altered sort of in the near term as we think about the back half.
No I mean I think.
Outside of FMT, and there's 2 things I think we highlighted within the quarter..1 some of the challenges we have with our facility consolidation of energy and then just the year over year comp for FMT and the pressure.
So thats, putting on Smt's margin last year, they were at record backlog levels at some really large projects. So the.
The second and third quarter that will weigh more on ft, fmc's margins year over year, but outside of that the other 2 segments should perform pretty consistently with how they've done in the first half of the year.
Got it and then just wanted to just confirm what I heard on the price cost spread you said it was a little bit compressed near term, which makes sense.
We assume that we exit 'twenty, 1 with US I would say what is a more normalized spread for you guys. There.
Exactly yes.
Perfect. Thank you.
Thanks Bill.
Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone.
Hi, Nathan.
I wanted to just follow up on flow M day, and obviously had a pretty big impact in the quarter can you, maybe just give us a little bit more color on recent order trends recent backlog trends.
There when do you think that will switch from being a drag to being a tailwind is as that business returns to some growth.
Sure I mean, that's.
It's like it's a tough story for that business. They had they were they were burning backlog nicely.
I guess the point of acquisition then of course, Covid came along and devastated a lot of debt.
<unk> markets there.
And you know, it's a little bit more project intensive than the average IDEXX business just by the nature of what they do these are the large units that they are going out there.
The transfer in large pipeline projects and things like that so.
And then if you think of that environment I mean, there's been a couple of very sort of public shocks in that particular.
Area as well and we're just right now the spend is very intentional towards some other things just simple maintenance and those kind of items. So I think it's going to be a little while before that breaks.
That said the international markets are a little different than what we're seeing here in North America. They are generally more favorable that business has been pointed towards those strategically along.
Long before we bought them and continue that way. So we think that that's a nice extension for it.
But I think as we saw even with the events that happened here a little bit recently it didn't take too many days for things to be offline before that our economy felt it.
And this business makes them incredibly great nice pieces of technology that are very useful.
And that in that continuum. So we like it from a long term and what it does.
We think the prospects long term are positive in nature, but I think it's going to take a while for the spend here because of the nature of it and where it is happening to break free.
On a sequential basis, though we at least kind of hit the bottom or.
Or is there still more down here in your in your opinion.
Now I think I think the bottom is a fair characterization.
Okay, and then I just wanted to follow up on the digital investment that you've made in fire and rescue.
Any color you can give us around.
What that is what the future digital investments look a lot from.
Our IDEXX and how you expect that to impact a variety of your businesses.
Yeah, Yeah. So I mean like it's it's really small but from time to time I think that's the nature of what some of these things will be I will tell you. It extend some of the things we've been working on anyway and talking about it I think for for a while now we've talked about some great work that we're doing to automate.
<unk> net job happened.
So, replacing a sea of levers engages employees with a touch screen and we've got some.
Outstanding products that we sell to automate that know this small extension allows you to take some of that data off the truck essentially make it more affordable and available to be used in other areas for firefighters.
So I think it's a good example of this kind of things will probably see from time to time from IDEXX.
There are some jobs that we're doing and there is a way to enhance it and make it a lot more valuable than sometimes it actually comes in very small little transactions like this 1.
And so it's an indicator of things things to come and levers.
Nice scale that we have in fire and rescue and a lot of things we've been working on for a number of years.
Is this kind of technology transferable to other parts of the portfolio or is this really just great kind of thing.
It could be we didnt, we didnt selected for that reason.
Never say never if there's things here that you can imagine what happened.
And in other places we'd be careful given the small size of it.
And just what kind of an 80.20 organization anyway. So let's focus on the job we need to do at hand, but I wouldn't I wouldn't rule it out entirely.
Great. Thanks for taking my questions.
Thanks Nathan.
Our next question comes from the line of Scott Graham with.
Without Securities. Please proceed with your question.
Hey, good morning, Eric So Mike.
Scott a couple of questions maybe around price cost I know I've heard all the commentary would you be able to tell us what price cost actually was in the quarters.
What that GAAP loss.
Yeah, Yeah, we said our historical price cost spread of somewhere around 20, or excuse me 30 to 40 basis points that we compressed a little bit under 20 within the quarter.
And again the pricing actions that we've taken we've looked to be back at that normal level here as we progress through the back half of the year.
Got it thank you.
The other thing.
I was going to ask because he's certainly around the <unk>.
Projects because.
You know.
Some of these things can be.
Our obviously can be very lucrative to you because they are you know that.
The customer chooses you to do something that cause.
So it's really the pricing power in there.
I was just wondering kind of like do.
Do you think that based on what you're seeing out there.
Some of the quoting activity that you're hearing about through just true distribution is this a conversion into the let's say the early part of next year.
We have a lot of experience on this stuff so when in this sort of funky cycle that we're in.
When do you start to see that when would you normally start to see that is that early next year yield potential.
I mean it varies.
I mean, you've got some degree, but I would say the median of that distribution would say if you're talking about it now than at the distributor level with things that we would have to do to be involved in terms of specifications and then their standard lead times were using up the longest 1 anyway.
There are parts of that would go into a project. So if I had to say where is the medium zone, it's probably in the beginning.
Of 2022, where a lot of it would actually be put in place things of that nature. So.
But some could be sooner some could be later it again depends if it's a wide spectrum given the nature of IDEXX, but probably the sweet spot would say you talk about it now through the back half you planet, maybe get it booked and you'd see some of it run out into the beginning.
Part of next year.
Got it got it and last question.
Same for you Eric So you you talked to around the <unk>.
Why the organic was maybe a little bit below the guy. This is essentially what youre, saying here is that those delays.
<unk> moved from <unk>.
<unk>, which is maybe why <unk> is sort of like an outsized organic.
Well I mean like anything that was constrained on our side of course is people still want it it's going to move into the next place I mean for which were ultimately thinking about not just us but everybody is how you go to that next.
This level of output and throughput and capacity and of course as you know we're kind of low on the food chain and a lot of places. So it's only as good as everybody being able to make a move up at this point. So I think right now where we are is a lot of things that has kind of stabilized around this reality.
Everybody is working on it us included.
We're coming up in the fall maybe labor availability for for people that are more labor intensive that gets better.
I think that's the kind of ramp that you would start to see it's less a complex math problem and more just ultimately people working like crazy to figure out ways to get to a place where you can process more of the backlog that many of us have.
Understood and I promise. This is my last question.
This is the time of the year, where your predecessor started to talk about.
Sort of a construct around 2022 sales that was kind of what my earlier question was starting to get to is there anything you could offer on 2022 at this point Eric.
I would not want to do that.
This would normally be the time, but I mean, there is a lot of variables still out there, including 1 we haven't talked about yet here day, which is what is the nature of our virus go and things of that sort. So I just it would be too speculative and wouldn't really I think imply a lot I think.
What we we generally feel as I said before that we think that the.
That may be strong winds at our back are going to continue we know that we and others are working to elevate capacity and throughput, which is going to be beneficial to all of us.
And there is just a function out there that eventually variables have a tendency to smoothed over time and they become expectation and we see all of those things leaning up for more positive day bad.
Thanks, a lot.
Thanks Scott.
Our next question comes from the line of Matt Summerville with D. A Davidson. Please proceed with your question.
Thanks, a couple of questions when you're pricing has come up a couple of times here in the Q&A and I was just wondering bill.
Bill if you could provide an absolute terms what your price realization was through the first 6 months of the year and how much incremental price capture you are looking for it to get back into that 30 to 40 basis point spread that you you typically aimed to be them. Please.
No I mean, yeah.
Close to a little over a point in the first half organic accelerate from that in the back half.
Would be kind of the framework I'd give you.
And then given your answer to an earlier question Erika a steady state of tougher bad or whatever sort of word you use them talking about supply chain.
We were resulting I would imagine in similar anxiety among your customer base with you being a supplier to them in that sense do you get to do you get the sense that they're pulling forward demand or over ordering can you talk about what you're seeing in terms of sell in and sell through through into your distribution channel sleep.
Is that.
Yes, so I would say.
We've had this question now from a couple of quarters and generally as you know we do a lot of customized product a lot of things that are very very hyper specific I don't have a lot of like just <unk>.
High volume stocking orders and things like parts. So.
So we're not a great company to stockpile.
A lot of material that being said I, probably would point to this quarter is a higher number of that.
Because of our own lead times are extending and that's an unusual occurrence we're aggressively doing some things on price us and everybody else. So I don't think it's a giant number for this Friday can you just kind of can't be but it's in.
They're more than we've seen before in terms of people trying to get a place in line or potentially say, hey can I I'll take a risk here and so I can avoid part of the price increase but again. This is a point or 2 of the company. It's not a giant part only applies in certain places.
This distribution.
You go to a lot of our distributors.
It's not going to see a lot of product on the shelves, mainly because of just the model, it's often needs to be customized at the last minute to some regard we have quick lead times anywhere it doesn't add a lot of value to sit on a shelf somewhere and make that guess so.
I guess long story short, we we have probably a higher incidence of this then.
<unk> simply do but because of the nature of IDEXX, it's still a really really low number for us.
Got it thank you guys.
Thanks, Thanks, Matt.
Our next question comes from the line of Rob Wertheimer.
<unk> Research. Please proceed with your question.
Hi, Thanks, good morning, everyone.
Hi, Rob.
I was just from the comments you made in the prepared remarks on Capex spending opportunities advanced manufacturing and I'm wondering if you could expand on them really in whatever direction, you like but I was curious about ROI versus inorganic investment right now maybe specific margin improvement on projects that youre doing related to that maybe.
Maybe how far down the road Europe has been ongoing for a long time or if there is a real shift here and what it could mean for margin potential over time.
Love to hear more about it.
Alright so.
We don't have a lot of capex intensity at IDEXX anyways, but it is a it is a ramp up from where we've typically been a lot of it is attributed to.
The story around emerging markets for us, where we're taking very deliberate actions in both our areas of concentration in China, and India to make long term infrastructure beth's over there to support really really really good local for local capability set that we have so there is the big driver there that of course doesn't reoccur all that often.
To the outside of that its a next level down in the category of doing it more than we used to.
Would be things like factory floor automation.
The technologies available is pretty phenomenal today and the cost points have come down to the point, where even in our world. It makes sense from time to time to put a robot where somebody was standing before particularly.
We've got some labor availability issues and a lot of it high technology based so those are projects I think there's a graphic on the slide deck that I used is something that we're actually using in that area.
That's.
I mean, it's a great lever of operational productivity it doesn't necessarily inflect the curve to tremendously, but it really helps us from a business.
We wanted to concentrate our efforts on very talented people and putting them in the areas, where we're growing the company and drawing from within as opposed to having to go out on the outside.
Yes, and I would say the returns on those investments are.
Our highest return investments we can make I mean generally 2 to 3 X what we do on.
<unk> Nx side, because the return profile of the margin impact. These are 10 or 12 to 18 months return profiles for things on both the productivity and the growth side.
Okay. Thank you.
Our next question comes from the line.
Joseph Giordano with Cowen. Please proceed with your question.
Good morning, guys. This is francisco on for Joe could you talk a little bit about.
Just give us some detail on what youre seeing on municipal budgets and any sort of expectations there around the infrastructure build as well sure.
<unk>.
Well I mean, there's always interesting dynamics, there I mean, I would say number 1 the the financial positions of most municipalities certainly here in the United States I, probably thought to be better than they were let's say a year ago you know.
There's a lot of the stimulus money and things like that comes in in tax receipts have generally been higher.
I think just overall financial condition is good your question on the infrastructure spend thing is interesting I mean, there's always a question of how long did you go from a concept to an actual project based reality and how long that takes.
Ultimately, there's different parts of IDEXX, where that would that would actually help us in a good way I'd point.
So our water business is 1 of them.
A lot of talk in that bill about water infrastructure and the criticality of their I mean, 1 of our businesses doesn't an awful lot of great work on sort of flow monitoring studies, which ultimately support capex projects like you'd have to do 1 to then determine what it is you're going to buy in terms of capex. So.
2 I think we're well positioned there and there's some other pockets as well, but like always it probably will take longer to play out and run through the system than we might imagine.
But I would put it in the category just like and you know Theyre seeing I think from receipts and economics that it's positive and certainly in a position that's better than I might have imagined it would be as.
And into a pandemic.
Yeah.
Thanks, that's very helpful and if you could maybe talk a little bit about your expectations for fire and rescue I know you guys have it down for for the market outlook.
Maybe a little bit more longer term what drives the recovery there.
Well sure I mean.
Our fire and rescue business is I mean, they're phenomenal businesses, we've added to them over the years, we've got a nice scalable concentration and it's 1 of our most geographically dispersed businesses. So you start with the premise that we've got incredible assets in that space.
We've always said it was kind of a mature steady.
Market for us as a backdrop overall.
Yeah, there's a couple of things going on there that at least in the near term probably put it into the Red zone. Most for US 1 is that industry is even before the pandemic was struggling with output execution around chassis and trucks and things and a couple of different geography.
Obviously, what's going on now is it making that better and so just backlogs on fire trucks continues to be as long as it was a year ago, if not longer. So you have you have a little bit of a moderation effect there and then in the emerging market side, specifically, China and we've definitely seen we've seen a couple of ways now.
Push for localization versus.
In our case, we actually do a fair amount of imported products into that zone to complement our local brand there as well.
And.
I don't think long term that hasn't necessarily impacted us, but it does impact us from a timing perspective tends to keep tenders captive until we sort of see how it runs out and so that's maybe the new element on.
But the existing element.
And then.
Basically its pretty steady market anyways.
I always encourage people when they think about it this is where like what we're doing in terms of our application sets on a critical job matters. So like the discussion we had earlier about automation and the things that we're doing to change the nature of the job is the.
Entitlement with great well positioned global assets on a you can still think of it as a mission critical job very steady state.
Generally it is going to be something that supported in the long term with with funding and things, but it does go through certain ebbs and flows and right now it's on it's on 1 of the more.
Red not green zones, but we think long term.
It's going to be fine.
Yes.
Thanks, a lot.
Thank you.
Our next question comes from the line of Bryan Blair with Oppenheimer. Please proceed with your question.
Okay.
Good morning, everyone.
Hi, Brian.
I wanted to quickly follow up on Nathan's.
<unk> question regarding your digital investments fire and rescue any color you can provide on how we should think about that technology and extension of Sam capabilities.
Well I think I think without spending too much time on lots of details here you can think of it.
Sam unit and for the others on the call. This is essentially the brand name.
Trade name for the automation that we do within our mobile application.
That brings together a lot of important data points, some of which are related to our hardware. Some are related to others that are in that mobile platform and you can think of it in the simplest way is this technology allows us to come off the truck.
It's a way to make that happen.
They get more mobile and less truck based.
Okay. It.
It sounds like a very natural extension.
And you offered.
Understandably nuanced answer with regards to the action ability of the M&A pipeline.
And in simple terms can you share the size of the funnel relative.
To pre pandemic levels.
Yeah.
Yes.
Certainly in terms of ours, if we just listed up the things that are on there and added up it tends to transaction prices it's larger.
It's larger I think largely because of the work that we're putting in as we consider things and where we could go and how we can resource it with both people internally in the company.
<unk> and consider the firepower that we have to deploy so.
Yes, I think it's safe to say it is a larger funnel by potential transaction size.
Okay I appreciate the color. Thanks again.
Thank you Brian.
Yeah.
There are no other questions in the queue I'd like to hand, the call back to management for closing.
In your remarks.
Okay, well I'd like to thank you all for joining and spending some time with us here today.
As we said in the prepared remarks from the beginning I mean really really dynamic time with a lot of variables kind of swirling around you know what what we talked about in our business. As we you know we get all of that and we deal with that on a day to day.
Our basis, but at the end, we ask people to take a deep breath and have come back and recognize that when a world kind of goes through its going through it has a lot of problems that need to solve that need to be solved and the IDEXX technologies that we have and the people that we have that drive them. They made up well with these kinds of demands. So we've got welcome.
Well positioned businesses, we got incredible teams and talent, we're really really focused we've you know we're now to a phase of 80.20, where it's very very intuitive and we're putting that to work in whats no doubt the dynamic and variable environment at the end I think the trade winds here are very favorable we believe in them.
Strongly in our near term or.
Medium term and ultimately the long term prospects of the company, but recognize we kind of have to live moment to moment as we're going through this with an eye on the horizon and I assure you. That's the 1 that we're thinking about the most thanks again for joining us.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
You may disconnect your lines at this time and have a wonderful day.